Q2 2022 OPKO Health Inc Earnings Call
Good day and welcome to the Opco Health second quarter 2022 financial results Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.
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Also note. This event is being recorded and now I'd like to turn the conference over to you Yvonne Briggs. Please go ahead.
Thank you operator good afternoon. This is Yvonne Briggs with L. A J. Thank.
Thank you all for joining today's call to discuss Opco health financial results for the second quarter of 2022, I'd like to remind you that any statements made during this call by management other than statements of historical fact will be considered forward looking and as such will be subject to risks and uncertainties that could materially affect the company's expected results those forward.
The statements include without limitation the various risks described in the company's SEC filings, including the annual report on Form 10-K for the year ended December 31, 2021, and in subsequently filed SEC reports.
The conference call contains time sensitive information that is accurate only as of the date of the live broadcast August 4th 2022, except as required by law <unk> undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances. After the date of this call before we begin let me review.
The format for today's call Dr. Phillip Frost, Chairman and Chief Executive Officer will open the call.
Doctor Elliot Zerhouni, Vice Chairman and President of Opco will then provide an overview of Opco pharmaceutical business, Dr. Jon Cohen will discuss bio reference laboratories, and after that Adam Bogo, Opco CFO , who will review the company's second quarter financial results. Then we'll open up the call to questions now I'd like to turn the call over.
Her to Dr Frost.
Good afternoon, and thank you for joining today's call to discuss our second quarter financial results and business progress.
Last quarter, we announced the acquisition of <unk> Therapeutics.
A biotechnology company focused on developing unique advanced multi specific immunotherapies for cancer and infectious diseases.
I'm really pleased to say that the integration of <unk> into outgrow health is proceeding smoothly.
We continued to be very enthusiastic about their transformative platform technology, which we believe has the potential to provide better outcomes for patients.
These multi specific antibody technologies and vaccine programs.
Our differentiated from the competition and has garnered significant interest from potential big former partners for various applications.
We look forward to keeping you apprised of our progress.
As I mentioned in our last call Dr. Elias Zerhouni co founder and Chairman of <unk> was appointed President of Opco and has joined the company's board of directors as Vice Chairman.
Doctors are huni as a former director of the National Institutes of health and has significant experience in the industry.
Head of global research and development for Sanofi for nine years.
Along with L. Yes, the Moto X team of outstanding scientists brings significant expertise to advance both <unk> and Opco proprietary pipeline through the clinic.
Oh, Yes, we will provide further details on their pharmaceutical business momentarily.
Pfizer, our commercial partner friend, Jean Luc or ceramic.
Mercury again has launched a weekly injectable growth hormone product in Japan.
In other countries, including Germany, Canada, and Australia draws or beliefs clinicians or patients will welcome a once weekly injection therapy versus daily injections, the standard of care for more than 30 years.
In the U S. We continue to work with Pfizer on resolving the Fda's comments regarding the BLA submission.
Pfizer remains fully committed to bringing <unk> to patients globally.
As soon as possible.
They may December four holdings announced the closing of their acquisition of <unk> for $150 million before adjustments of course.
It's 80 million shares of similar for common stock.
Subject to revenue milestones.
<unk> may receive an additional $150 million over the next two years payable in either cash or stock.
We look forward to the progress of the combined company.
We limited our joint venture partner in China is gearing up to commence a phase III trial of walks into module one for the treatment of obesity and type two diabetes now scheduled to begin in early 2023.
Also we determine it is preparing to start a clinical trial of our factor seven C. T P and novel long acting coagulation factor to treat hemophilia.
The data from both trials will be available for upgrade to seek regulatory approval in countries outside of China.
With that brief overview I'd like to turn the call over to <unk> and then John will discuss our references quarter re leasing results and initiatives.
Thank you Phil and good afternoon, everyone.
The <unk> team and I are very excited to be a part of up co and to be able to advance our leading edge technology platform, while building upon <unk> strong foundational work that's.
As Phil said, the transition is going extremely well and the integration of our team with of course team is going extremely well by way of background mud ex therapeutics are I should say that in 2012 and Dr. Gary Nabel and I initiated a breakthrough laboratory within China.
C with a mission to explore technologies and concepts.
Focusing on various applications, including oncology infectious diseases and vaccines, but all in underlying thesis was that future therapies needed to comprise smarter molecules designed to attack multiple points in the disease pathway and also in the subsequent years we advair.
<unk> several multi specific drug candidates into the clinic.
And in 2020, we founded <unk>.
And in licensed the technology from Sanofi that we had developed in our breakthrough lab to further develop our ideas and the next generation of multifunctional therapeutics and given the important prospects of this technology and the excitement about the potential of this technology most of the experience Sanofi.
Team joined us at <unk>, and they're continuing their important work here at Opco.
I'm proud to say that we have attracted a top management team with significant experience in academia and government industry and we're in the initial stages of integrating the team into Opco as we make progress with the <unk> pipeline, while understanding and prioritizing OPE close technologies that pipeline as well.
At this time I'd like to provide you with a bit more background on model X two fundamental platforms.
First is our proprietary star technology platform.
<unk> was designed to allow us to go beyond three targets and up to a total of six and that means that we can create multifunctional molecule in the plug and play platform that is much more flexible and functional than previously available.
On top of that we own the intellectual property that's supposedly technology.
And our systems optimized functionality and manufacturing simplicity, which is typically a difficult feat for a multi specifics.
Pipeline using the star technology comprises therapies for infectious disease and oncology.
Infectious diseases.
We already have experienced with the twice specific candidate.
All up with our subtlety technology, when we were in the breakthrough lab in phase one for treating HIV, that's supported by NIH as well as two preclinical.
What are your specific candidates also targeting HIV. In addition, we have used our own star technology to develop several Sars cov two molecules come at two in late preclinical stages, partially funded by DARPA with the potential of controlling actually the emergence.
Variance of concern.
You know ecology, we have two targets focused on hard to treat solid tumors and and one target one molecule focused on liquid tumors and these programs in oncology are all in the preclinical stage nearing the I N D stage and hopefully we'll be reporting on them as we are.
Rents are.
Our second platform focuses on vaccines.
And utilizes a sheraton platform.
Sorensen isn't necessarily protein for all cells as it brings Ireland for their metabolism.
However, it's a protein that can self assemble in a way that that it makes a particle that can be used in fact to carry antigens on its surface in a scalable and cost effective manner, which can essentially become the bases the base of multiple vaccines and that's what we are.
Have done and we know that this platform is safe as it has been two phase one clinical trials with the NIH and a first application for this technology is targeting E.
E B V or the Epstein Barr virus is the virus that is responsible for mono nuclear ulcers, which also can lead to multiple cancers. But also has been found to probably be the cause of multiple sclerosis recently that application is in the preclinical stage.
As mentioned by Dr. Frost, we're currently in exploration of interest and discussions with several pharma companies for potential partnerships surrounding the smartphone. So we look forward to providing further details regarding our multi specific technology platforms and products in the near future.
Mentioned, we're excited to be part of a co. It has gone extremely well.
We believe the combination of the two companies.
The potential to provide meaningful benefit to patients and significant value to shareholder.
So now let me turn it over to Jon Cohen, who will speak about bio reference laboratory John .
Thanks, Elliot and good afternoon, everyone. The second quarter was challenging due to rapidly declining COVID-19 business, while our base business right of recovery with slowly.
We have built up resources and capabilities in response to the current spike.
I've had to reset our cost structure and strategic focus as the demand for testing fell as well.
Rapidly as it had road rhythm.
In order to return to our margin profile and increase growth.
We are focused on a three pronged strategy.
Number one we will continue to execute our reach initiatives of cost reduction that we started in January of this year. This initiative that reduced costs by over $40 million. This year and our intention is to take out an additional $100 million in cost by the end of the year.
We now have over 100 work streams that touch every part of the organization to ensure an aggressive program to align costs with our go forward plan.
Costs related to the infrastructure, we have built to deliver on our highly successful Covid testing program over the last few years touch every single part of the organization.
As you remember.
<unk> of Covid, we had nearly 8000 employees at bio reference and by the end of the July . This July our employee count has now been reduced to 3600 employees, including reductions of approximately 700 associates in June and July .
Number two we will aggressively pursue revenue opportunities with our investments in oncology women's health urology and ventures, all of which have deer, which have near term growth opportunities.
We are evaluating new offerings and the Gyn's space to launch in Q3, and Q4 of this year and oncology continues to perform.
Oh.
3% over prior year and up 8% sequentially from Q1 of 2022, our next generation sequencing Oncotype portfolio is up 9% versus the prior year.
In addition, we have added three leading academic medical center oncology centers as a result of our strength in somatic cancer testing <unk>.
Ventures continues to perform well as we have added several new acos urgent care centers and hospital reference contracts during the quarter.
Our relationship with the Westchester Health system continues to grow with added hospitals reference work genetic services at outpatient services.
Number three we are changing our organizational structure to be more efficient and aligned with how we move the business forward in a post COVID-19 environment, along those lines. We have created a new four clinical leadership structure, including the Chief operating officer, the Chief Commercial officer, the Chief strategy Officer at present.
Net of Scarlet of digital services.
This moves us away from the highly complex structure, we had built to deliver COVID-19 testing to literally hundreds of clients.
Over the two years, we performed over 23 million lab based PCR Covid tests and several million point of care tests and at the peak had the capacity to perform.
<unk> thousand PCR tests a day.
This was accomplished while maintaining a structure for the existing business and specialty verticals as expected our COVID-19 volume continued to decrease throughout the quarter. During the second quarter, we performed 1 million COVID-19 tests.
Parents of $2 1 million performed in Q1 of 2022 and 3 million tests performed in Q2 of 2021.
Despite the testing environments, having move predominantly to home rapid testing there is still significant interest in some sectors to continue lab based PCR surveillance testing.
Moving on to the payers.
Our commercial payer strategy continues to be successful with the renewal of our preferred lab network agreement with Unitedhealth care for the fourth consecutive year.
We have access to over 74 million lives through preferred status with Unitedhealthcare, Aetna and Oscar health.
In the first six months of 2022 we added 11 million additional lives through local and regional agreements as of today, we have 85 million lives covered by Scarlet health with ongoing discussions with most health plan.
In addition, we have launched several gaps in care programs for heaters and star ratings with key health plans leveraging Scarlet health.
The heat of Star ratings are widely used tool to measure improve and compare health care effectiveness quality and outcomes.
Finally, let me update you on Scarlet Pearl our mobile alternative to traditional laboratory specimen collection, and which we have been making significant investments Scarlet is now available to more than 150 million homes across the U S has a lifetime net promoter score of 92, and our client retention rate of over 100 of our Hunter.
Per cent.
These are important metrics as it validates the value of our existing customers and is a great way to drive growth. We continue to see significant demand for Scarlet health services across our different commercial verticals, including oncology women's health urology and the core business strategic venture clients, including health systems and large medical groups are utilized.
Scarlet to close gaps in care for value based contracting.
Teladoc health publicly announced their collaboration to increase Scarlet availability to tell a doc millions of primary the primary $3 60 members based on a pilot program with Scarlett, which increased Teladoc completion lab orders by 'twenty, two and a half per cent.
Our other national contracts include Oscar Health, and Optum virtual primary care network and now let me turn it over to our CFO Adam.
Thank you John .
We ended transformative second quarter with the closing of two significant deals and the transitioning of our bio reference business to adapt to NIM.
Covid.
As you know we closed on the acquisition of <unk> This quarter and issued approximately 90 million shares of Opco common stock.
The fair value of these shares issued at closing were approximately $219 million and we recorded approximately $195 million is non amortizing in process research and development as well as $66 million of goodwill. The details of this transaction can be found in our Form 10-Q.
Pfizer our partner for a long acting growth hormone recently launched in Germany, and Japan, Germany, and other countries, which triggered $85 million in milestone payments and the commercial launch in Japan commenced our gross profit sharing for the hgh franchise in the Japanese.
In each region.
As defined in our agreement with Pfizer.
This gross profit share include sales of in general as well as Pfizer's genome drove them.
Japan is one of the largest markets for hgh in the world and represents a significant commercial opportunity for jumbo and.
In addition, we are earning royalties on commercial sales of engine for markets that have been launched by Pfizer in Germany, which is also one of the largest pharmaceutical markets in Europe .
Once pricing is approved and in general is launched in two additional major markets in Europe , we will begin earning a gross profit share in the European region as well.
On April 29, we closed our transaction with semaphore with they are acquiring <unk> for $150 million.
Gross cash at closing and 80 million shares of <unk> stock after considering transaction expenses working capital adjustments and a $13 $4 million cash escrow net proceeds at closing were approximately $116 million.
We recorded a $15 million gain on the disposition of Gtx, which is included in our operating results. In addition, the 80 million shares. We receive were recorded at fair value on closing and fluctuations in <unk> common stock price at each reporting period will be mark to market of other income and expense.
Sure.
As of June 30, we recorded a noncash other expense of $71 $2 million related to the decline in <unk> stock price.
Post closing.
As a reminder, we are eligible to receive up to an additional $150 million in cash or semaphore shares upon the achievement of certain revenue targets for <unk>.
During 2022 and 2023.
Moving to operating results, our diagnostics segment reported revenue of $186 $8 million compared to $397 $2 million for the 2021 period.
This decline reflects decreased COVID-19 testing levels.
The broad testing market has shifted to rapid at home testing as John highlighted we performed approximately 1 million Covid diagnostic tests this quarter down sequentially from Q1, 2022, where we performed more than 2 million Covid diagnostic.
And down compared to the approximately 3 million tests performed in the second quarter 2021.
In addition, during the quarter a significant shift continued into point of care from lab based PCR Covid testing within our business lines, which comes at a higher cost to serve and lower margin profile, which impacted negatively overall gross margin and operating.
Throughout the first six months of the year with an accelerating pace throughout the second quarter, we have reduced our employee count and related payroll by more than 38% and are approaching pre pandemic levels.
For employees.
Further we are reducing delaying or eliminating our longer term commercial initiatives, including initiatives around Scarlet health and our digital health platforms, while we bring the remainder of our cost structure in line with our expected volumes.
When looking at our base business in total despite the strong rebound we saw during the first quarter of this year, our second quarter volumes flattened and as a result have negatively impacted overall gross and operating margins.
As a result, our operating loss for Darden Diagnostics segment was $57 5 million compared to operating income of $30 million for the comparable period of 2021.
Moving to our pharmaceutical segment, we reported revenues of $123 1 million for the second quarter.
<unk> to $45 $2 million for the 2021 period.
Revenue from product sales in the second quarter increased to $35 9 million, which included $6 million of revenue from royalty, which compares to $35 7 million for the 2021 period, which included $5 million of reality.
With respect to revenue from the transfer of an intellectual property, we reported $87 $2 million.
For the 2022 theory period compared to $9 $5 million from a year ago.
This increase reflects milestone payments for the launch of <unk> in Europe and Japan.
Operating income from our pharmaceutical segment was $55 4 million for the second quarter of 2022.
While the comparable period of 2021 reporting reported an operating loss of $13 $7 million.
Overall research and development expense for the second quarter of 'twenty, two was consistent with the 2021 period at $14 8 million.
With the approval of Soma, Sroge and amortization of intangible assets increased to $16 7 million from $5 million, reflecting the reclassification of iconic IP R&D to an amortizing intangible asset.
Turning to the consolidated financial results of the second quarter, we reported an operating loss of $10 7 million compared to operating income of $5 $6 million in the 2021 period.
Net loss for the second quarter of 2022 includes the $71 $2 million noncash mark to market adjustment for declines in the price of <unk> common stock, resulting in a loss of $101 7 million or <unk> 14 per diluted share for the quarter compared to a net loss.
Loss of $16, two or <unk> <unk> per diluted share for the 2021 period.
We remain in a strong financial position with as a result of our overall cash of $210 million on our balance sheet, along with an additional $53 million of availability under our credit facility with JP Morgan.
As we look at the remainder of 2022, we have updated our assumptions to the following.
We anticipate performing between three three and $3 5 million Covid.
Covid PCR point of care antibody.
<unk>.
Including the $3 1 million tests performed during the first six months of the year.
We have not assumed any new surge in COVID-19 testing for the remainder of 2022.
As such expect our core laboratory business.
Consistent with our second quarter volumes.
We have made adjustments to reflect the accounting treatment for the <unk> acquisition, and the disposition of gtx, including the $15 million gain.
We have not forecasted any mark to market adjustments in the semaphore common stock, we hold which is recorded in other income and expense, but does not impact our operating results.
At June 30, our carrying value of <unk> common stock was approximately $102 million.
With that overall, we expect revenue for 2020 to be between 950 and $1 billion, including.
Including revenue from services of $700 million to $750 million revenue from products of $140 million to $150 million in other revenue of $100 million to $110 million, we expect costs and expenses to be between $1 1 billion and $1 2 billion.
Which reflect various assumptions of testing volume.
Operating results include approximately $100 million of noncash depreciation and amortization expense as well as an expectation of research and development expense of $74 million to $80 million.
Thank you all.
Great and would you please open the call for questions.
We will now begin the question and answer session, if you'd like to join the question queue. The instructions are in our press Star then one.
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We will pause momentarily to assemble the roster.
Oh.
And our first question comes from Maury Raycroft with Jefferies. Please go ahead.
Hi, This is Kevin <unk> on for Maury, Thanks for taking my questions.
First question was just on for COVID-19 testing could you say what percentage of testing at this point is done within surveillance contracts and how durable you think these contracts are over the next few quarters and then how this fits into the refocusing strategy that you mentioned in terms of really.
<unk> margins.
Yeah, So I would say this.
John .
Majority of the Covid testing is now through the surveillance contracts.
Once the omicron came back down to the testing of the general public or people going to their physicians they get testing or health systems has really dramatically gone away. So most people are doing home testing or we're doing surveillance testing for multiple contracts.
As we enter as we exit the summer into the fall one of the bigger questions is going to be.
We're dealing with now with how much school testing.
We will continue to do although I can tell you that there has been some.
And an uptick in multiple school systems around the country, who are desiring a <unk>.
Our solution for the fall so because what's happening is it's not all kids are getting vaccinated.
School systems are trying to figure out how they're going to implement a testing.
Testing protocol that is both safe.
Safe and reliable, but at the same time.
Dresses the issues about kids not being vaccinated, so that I think that's the big unknown as we go into the fall.
So Kevin it's Adam just to touch on that so we have and as you heard in the volumes in my guidance, we haven't projected any significant contracts to come through so there is there is some upside if what John just mentioned does actually translate into some some overall.
Business, but I think if you were to you were to look at the volumes in the first first month of the year were down around 3%, 3% to 5% of those volumes now as we exited Q2 and have gone and it's been consistent through July so so pretty significant falloff in overall COVID-19 testing in our business.
Today.
Yeah.
Great. Thank you both and then just.
Just another question on the <unk> pipeline as mentioned that you are at.
It might look to partner out for EBV could you just clarify maybe if that's for the whole starting platform or just for <unk> in particular and then.
Just maybe if there is one particular oncology asset that you wanted to talk about that you're most excited about and and finally, whether or not we would get an R&D day at some point. Thanks.
Thank you Kevin.
The Nordics pipeline actually we have interest beyond EBV and so our conversations with them.
Major pharmaceutical companies are really related to the platform.
Because we had advanced EBV quite a bit in our prior work at Sanofi, obviously, that's the most mature asset, but there are other targets, which I cannot disclose to you at this point that are interesting and interest and have a.
Pharmaceutical companies interested in working with us on that.
Partnership with that.
In oncology basically we have three molecules to with.
A double targeting of tumors I can't tell you what the binders aren't but the technology is one of T cell engaging with the engagement arm being <unk> 28.
Other two targets are really focused on specific cancers, where the targets are known to be expressed and that's the quadri specific formats, which is entering IND studies as we speak.
In Yesterdays I'd Love R&D days, if we can find a good time, we'll be happy to do that as I said initially the fall.
We'd be a good periods of time to do that so we're looking forward to that.
Great. Thank you very much.
We have no further questions. So this concludes our question and answer session I'll turn the conference back over to Dr. Frost for any closing remarks.
Thank you.
So in closing.
I would like to just say that as I look it up go now.
Can only observe that this is a new day for the company and why do I say that.
It's because the.
In addition of <unk> two.
Our company brings with it.
Additional array of talent.
Can only be.
Positive and good for the company I'll mentioned, specifically a few people among the many who are part of the motive team first Doctor Gallery enable.
Easy.
Director of the R&D program at <unk>.
The president and CEO of the operation.
He was a founding director of the vaccine Research center at the NIH.
And then he was the Chief Science Officer at Sanofi.
Brilliant career and academics government industry.
Dr. Betsy enable professor at Harvard President of the Brigham and Women's Hospital director of the heart lung and Blood Institute.
Tremendous leader.
Dr. John Briscoe, most recently the director of vaccine Research center at the NIH.
He was the one who was directly responsible for the development of a large part of the Covid program.
So with talent like that and as I look at them only one word comes to mind and that success and I truly believe that as we move on with the other things going on in the company with the addition of <unk> and the people in the projects.
We have every reason to feel good about optical.
I'll leave you with that thought in mind sooner next time.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.